Tax treatment of re-insurance of BLAGAB – changes with immediate effect

United KingdomScotland

On 15 December 2022, tax changes have been announced, which have immediate effect, which apply to insurers which write, acquire or re-insure basic life annuity and general assurance business (‘BLAGAB’).

The changes are twofold.

The first measure addresses a possible tax mismatch within the BLAGAB re-insurance rules where re-insurance precedes a transfer of BLAGAB.

The economic transfer is typically effected by a re-insurance contract, pending court approval of the transfer. A tax mismatch can arise as the profits are initially taxed in the hands of the cedant as BLAGAB, then in the hands of the reinsurer as non-BLAGAB (pending the transfer) and then, finally, in the hands of the re-insurer as BLAGAB (following the transfer). A loss of tax could occur if a non-BLAGAB trade loss arose to the reinsurer in the interim period and was offset against total profits or surrendered as group relief. There was a concern that the impact of this may have been accelerated by transition to IFRS 17.

The measure announced today addresses this by classifying the re-insured business as BLAGAB in the hands of the re-insurer.

The second measure is intended to address an industry concern that the current scope of section 92 Finance Act 2012 was previously too wide and may be inhibiting commercial transactions. Where life insurance companies re-insure blocks of BLAGAB, there was a concern that amounts received under the re-insurance might give rise to deemed income within I-E.

The first measure will apply from 15 December 2022 regardless of when the re-insurance contract was entered into. In addition it will apply to the whole of any accounting period beginning before 15 December 2022 for which IFRS 17 is adopted, where the decision to adopt IFRS 17 is taken on or after 15 December 2022.

The second measure will apply to accounting periods ending on or after 15 December 2022.

For further information, please contact the authors or your usual CMS contact.